- The Selangor state government is expected to sign a new supplementary water agreement with the Federal government today, according to the The Edge Financial Daily.

- Citing sources, the report noted that the Selangor exco had met and approved the supplementary agreement yesterday.

- We believe that this new supplementary agreement will address the unresolved issues under the master agreement that was signed last Sept.

- Recall that the two governments had inked the master agreement for the state’s water restructuring exercise but the deal is yet to be finalised due to contention over several issues.

- According to reports, some of the contentions relate to:- (i) ownership of the water assets in Sg. Semenyih and Bukit Nenas; and (ii) 26,000km of pipe area in Selangor.

- It was reported that the impasse had resulted in the lapse of the master agreement in March when the Selangor refused to grant a third extension.

- Nevertheless, both parties had in the past few weeks affirmed their commitment to settle negotiations by Hari Raya. This follows a much-needed meeting between Selangor Menteri Besar Mohamed Azmin Ali and Energy, Green Technology and Water Minister Datuk Seri Dr Maximus Ongkili last week.

- We are hopeful that closure is nigh given the dwindling water reserve margin in the state (>1%) as well as delays in the construction of the Langat 2 water treatment plant. Note that the impasse had also resulted in development projects being stalled and in a high level of non-revenue water level (32%) over the past few years.

- Recall that Puncak Niaga Holdings Bhd had earlier this month said that it may rescind the deal if the conditions precedent are not met after Ramadhan. It had granted a sixth extension until 13 July to finalise the deal and is not keen on another extension.

- Amidst pressure to seal the deal, we are now more optimistic about an imminent closure; we expect the offer price for the water concessionaires to remain the same. Recall that Puncak will receive RM1.55bil in proceeds from the sale, of which RM534mil (or RM1.00/share on a fully-diluted basis) will be distributed to shareholders. We maintain HOLD on Puncak with an unchanged fair value of RM2.92/share; prospects remain cloudy beyond the special dividend payout. Our NEUTRAL call on the sector remains.

Source: AmeSecurities Research - 25 Jun 2015